March 16 (Bloomberg) -- Housing starts in the U.S. plunged
to the lowest level in almost a year in February and wholesale
prices rose more than forecast, hurdles for a recovery that the
Federal Reserve said yesterday is on a “firmer footing.”

Home construction dropped 23 percent to a 479,000 annual
rate, while building permits slumped last month to a record low,
Commerce Department figures showed today in Washington. The
producer-price index jumped 1.6 percent in February, the most
since June 2009, the Labor Department said. The gain exceeded
the highest forecast in a Bloomberg News survey.

Builders such as Ryland Group Inc. are battling
foreclosures, falling home prices and tepid job growth, reasons
why the Fed yesterday said the industry that precipitated the
last recession is still “depressed.” At the same time,
wholesale prices soared because of a surge in food and energy
costs that threatens to restrain business and consumer spending.

“Housing continues to collapse under its own weight,”
said John Herrmann, senior fixed-income strategist at State
Street Global Markets LLC in Boston. Higher fuel and food prices
are “acting as a tax on consumption that’s restraining spending
on goods and services.”

Morgan Stanley and RBS Securities Inc. were among firms
that reduced first-quarter growth estimates after the Commerce
Department’s housing starts figures. Economists at Morgan
Stanley trimmed their forecast to 2.8 percent from 2.9 percent,
while RBS Securities reduced its projection to 2.6 percent from
2.8 percent.

‘Very Cautious’

“Builders are very cautious about building new homes when
there’s a lot of inventory that is or could be coming onto the
market with respect to foreclosures,” Michelle Girard, senior
economist at RBS Securities in Stamford, Connecticut, said in an
interview. Girard said in a research note that “coming into
today we were looking for residential investment to be up
modestly in the first quarter, but now expect it to be closer to
flat.”

Stocks fell, sending the Standard & Poor’s 500 Index to the
lowest level since December amid concern Japan’s nuclear crisis
will worsen. The S&P 500 slumped 2 percent to 1,256.88 at the 4
p.m. close in New York. Treasuries rose, pushing down the yield
on the benchmark 10-year note to 3.21 percent from 3.30 percent
late yesterday. It dropped as low as 3.14 percent, the least
since Dec. 8.

Housing starts were forecast to fall to a 566,000 annual
rate, according to the Bloomberg survey of 74 economists whose
estimates ranged from 537,000 to 638,000.

Record-Low Permits

“Most of North America was covered in snow in February and
that probably had a depressing effect on housing,” said David
Resler, chief economist at Nomura Securities International Inc.
in New York. Still, “the decline in permits was an indication
of fundamental weakness.”

Building permits dropped 8.2 percent to an all-time low
annual rate of 517,000 units. They declined by 28 percent in the
Northeast to the lowest on record and by 14 percent to the
lowest ever in the West.

Construction of single-family houses decreased 12 percent
to a 375,000 rate in February, the slowest since March 2009,
from the prior month. Work on multifamily homes, such as
townhouses and apartments, slumped 46 percent.

Starts fell in all four regions, led by a 49 percent drop
in the Midwest to a record low. Starts declined 38 percent in
the Northeast, 28 percent in the West and 6.3 percent in the
South.

Fed officials after their policy meeting yesterday said in
a statement that while housing remains weak, “the economic
recovery is on a firmer footing, and overall conditions in the
labor market appear to be improving gradually.”

‘Biggest Impediment’

For housing, employment “is the most important part today
or biggest impediment,” said Larry T. Nicholson, chief
executive officer of Ryland Group, a Calabasas, California-based
homebuilder catering to first-time buyers.

Whether potential buyers “have a job and they’re going to
keep their job or whether their hopes of employment are out
there is still the biggest challenge for us today,” Nicholson
said at an investor conference March 8 in Orlando, Florida.

The Fed also said “longer-term inflation expectations have
remained stable” even with gains in crude oil prices that are
causing more pain for Americans at the gas pump.

The Labor Department said its producer-price index climbed
1.6 percent, the most since June 2009, reflecting gains in fuel
and the biggest jump in food costs since 1974. Core producer
prices, which exclude food and fuel, rose 0.2 percent, less than
half the 0.5 percent gain in January.

Raw Materials

The cost of raw materials has risen further as expanding
economies in Asia and Latin America lift demand, and crude oil
has been pushed up by turmoil in the Middle East. Even so, firms
have limited scope to raise prices to shield profits, allowing
the Fed yesterday to maintain monetary easing to spur growth
while citing “subdued” underlying inflation.

The cost of food increased 3.9 percent, the most since
November 1974, while energy prices rose 3.3 percent led by a 15
percent jump in home heating oil.

“As the Fed is saying, most of the economy is on a firmer
footing and is recovering, but the housing market remains
depressed,” said Sal Guatieri, a senior economist at BMO
Capital Markets in Toronto. “The inflation picture, though, is
a concern for the Fed largely because rising fuel and food costs
are draining purchasing power from households, and as a result
pose a downside risk to the economy.”